US Stocks Slide, But Weak Jobs Data Spurs Fed Hopes

KristinaPeterson

NEW YORK (MarketWatch) -- U.S. stocks fell modestly Friday on fresh signs of weakness in the labor market, but investors already braced for weak jobs data hoped the report could stir the Federal Reserve into action next week.

The highly-anticipated monthly jobs report dealt a double blow, as the U.S. economy lost more jobs than expected in July and the government revised sharply downward its previous figures for June. But investors with low expectations ahead of the report kept the losses in check, sending the Dow Jones Industrial Average down 35 points in recent trading. Still, investors flocked to safe-haven Treasurys, sending yield on the 10-year note to touch its lowest level in more than a year.

The jobs report added to a stream of economic data over the past few weeks that indicate the American recovery continues to weaken, and that has stoked fear that slowing growth could still push the country back into a recession. Compounding worries is that consumer spending, which makes up 70% of economic activity, could further erode in the face of persistently high unemployment rates.

Fueling Friday's decline, the government said nonfarm payrolls fell by 131,000 last month, more than the drop of 60,000 economists had expected. Only 71,000 private-sector jobs were added last month. The Labor Department also revised lower June's data to reflect a payrolls drop of 221,000, more than the 125,000 decline previously reported. The jobless rate held steady at 9.5% in July, slightly higher than the 9.6% reading expected by economists. However, investors noted that the unemployment rate was being artificially bolstered by a surge of discouraged workers leaving the work force.

Investors said low expectations for the report kept the stock market's reaction muted.

"Even though it was technically a miss and disappointing on all counts, those expectations, along with very little improvement in the third quarter are already baked into the stock market," said Sean Kraus, chief investment officer at Citizens Trust.

The Nasdaq Composite fell 0.3% to 2286. The Standard & Poor's 500-share index shed 0.4% to 1122. The Dow fell 0.3% to 10646, with Hewlett-Packard and AT&T leading the measure's declines.

Meanwhile, Treasurys rallied as demand for the safe-haven assets surged. The 10-year Treasury note rose, pushing its yield down to 2.86%, rebounding slightly after touching its lowest level since April 2009. The dollar weakened against both the euro and the yen. The euro broke above the $1.33 level, trading recently around $1.3329, up from $1.3186 late Thursday in New York. The U.S. Dollar Index, which tracks the U.S. currency against a basket of six others, shed 0.9%.

The jobs report is also expected to factor heavily into the Federal Reserve's decision whether to make a symbolic policy shift at its meeting next week. Fed officials will likely consider whether to use cash the Fed receives when its mortgage-bond holdings mature to buy new mortgage or Treasury bonds, instead of allowing its portfolio to shrink gradually, as it is expected to do in the months ahead.

"If they see a problem, they will act," Kraus said, though he cautioned the timeline was uncertain. "There is definitely a belief they might begin quantitative easing, likely the purchasing of more Treasurys or even mortgages."

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